Question: Murray Exports (B). Assume the same facts as in Problem. Additionally, financial management believes that if it maintains the same yuan sales price, volume will increase at 12% per annum for eight years. Dollar costs will not change. At the end of 10 years, Murray Exports' patent expires and it will no longer export to China. After the yuan is devalued to Yuan9.20/$, no further devaluations are expected. If Murray Exports raises the yuan price so as to maintain its dollar price, volume will increase at only 1% per annum for eight years, starting from the lower initial base of 9,000 units. Again, dollar costs will not change, and at the end of eight years Murray Exports will stop exporting to China. Murray Exports' weighted average cost of capital is 10%. Given these considerations, what should be Murray Exports' pricing policy?
Problem: Murray Exports (A). Murray Exports (U.S.) exports heavy crane equipment to several Chinese dock facilities. Sales are currently 10,000 units per year at the yuan equivalent of $24,000 each. The Chinese yuan (renminbi) has been trading at Yuan8.20/$, but a Hong Kong advisory service predicts the renminbi will drop in value next week to Yuan9.00/$, after which it will remain unchanged for at least a decade. Accepting this forecast as given, Murray Exports faces a pricing decision in the face of the impending devaluation. It may either 1) maintain the same yuan price and in effect sell for fewer dollars, in which case Chinese volume will not change; or 2) maintain the same dollar price, raise the yuan price in China to offset the devaluation, and experience a 10% drop in unit volume. Direct costs are 75% of the U.S. sales price.
a. What would be the short-run (one year) impact of each pricing strategy?
b. Which do you recommend?